Why CCGs should prepare for managing financial risk

Typically, actuaries are not knowledgeable about the hands-on delivery of clinical quality – but we know a lot about risk. We know how to measure, manage and mitigate it. We also know, no matter what the industry, it’s critical to implement a regime that incentivises sound financial risk management and penalises failures to control it; otherwise the likelihood of overspending against a defined budget will increase in the short term and could lead to financial failure in the long term.

Clinical commissioning groups are not immune – if the NHS is to succeed in managing its budget, there must be greater financial accountability at all levels. Bailing out CCGs that fail to manage financial risk should not be an option. Equally, using surplus from those that successfully control financial risk hardly seems equitable.

There needs to be a focus on incentivising and rewarding positive care outcomes, but there are reasons to base incentives on financial performance too. The detail of how such incentives and rewards might look and work in practice following the Health and Social Care Act is still unclear. The prospect of strict financial accountability appears to have been somewhat diluted since the original white paper in July 2011.

Distinctions between “service” risk and “insurance” risk have now been brought into the NHS lexicon. Service risk arises from mismanaging controllable activities like poor prescribing or referral practices, often described as “medically unnecessary care”, “clinically inappropriate care” or, more simply, “waste.” CCGs that fail to control service risk are likely to be penalised. This is apt as failing to do this adequately is tantamount to mismanagement. As such, it is unlikely to be aligned with clinical quality and, hence, care outcomes.

Insurance risk is a different beast, a result of uncontrollable fluctuations in a population’s healthcare needs. For example, service risk may arise if all people with diabetes are systematically mismanaged and some end up in accident and emergency unnecessarily; insurance risk arises when one or two such patients unexpectedly develop a severe complication that leads to a long and costly hospital stay.

Risk models (and actuaries) will tell you out of 10,000 people with diabetes, on average, a small percentage will develop that severe complication – but exactly who and when is random.

It is unclear how accountable CCGs will be in terms of successfully managing insurance risk. The challenge for them and the NHS Commissioning Board will be to clearly delineate insurance risk from service risk. It is reasonable to assume CCGs will have to minimise exposure to uncontrollable insurance risk as part of an overall financial risk management framework, which includes the statutory duty of CCGs to break even.

To measure is to manage

To manage any risk, CCGs must understand it and measure it. What is the likelihood of exceeding your risk-adjusted budget? Is the budget allocation adequate? Emerging CCGs require the redrawing of existing geographical boundaries, which makes budget assessment tricky. What are the key drivers of risk? Perhaps it is specific clinical areas, or population segments. It could be defined by service type, such as inpatient admissions, or by avoidable visits to A&E, the use of expensive drugs, overuse of advanced imaging tests, etc. And what actions can you take now to mitigate that risk?

The commissioning board will likely provide some form of risk pooling function, probably as an insurer of last resort. But CCGs, especially smaller ones, may be left with some residual risk. Pooling that risk with other CCGs is possible but to maintain equity among pool participants, two fundamental concepts of insurance are necessary:

• Pool participants should not be able to select against – or game – the risk pooling system and, hence, other participants.
• Each pool participant should pay a contribution to the pool that adequately reflects the risk each brings to the pool. This should not just reflect the likelihood of random fluctuations in, say, service use and cost, but should also reflect the protocols the participant puts in place to manage the risk – for example, implementing and adhering to evidence based clinical guidelines.

Successful management of financial risk requires people skilled at building simple models to understand which components drive high risks and levels of uncertainty around these risks. Actuaries are trained to look at the statistical distribution of outcomes as well as the average outcome. As such, CCGs can assess the actual risks based on historical evidence, adjusted intelligently to reflect the future, and make decisions based on a deep understanding of the financial consequences.

If the NHS is to successfully manage its budget and provide quality care, financial risk management must be a central facet to the ongoing reforms.

The authors will be speaking at the Commissioning Show on 27-28 June.